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Study: 33% Needed Thousands Extra to “Cash-In” Refi – Could You Do It?

by Darwin on October 28, 2010

You’ve gotta have money to make money, right? Well, apparently, you’ve gotta have money to SAVE money also. As this recent report shows fully one third of homeowners refinancing last quarter had to do “cash-in” refinances at closing. Dropping home prices and tighter underwriting standards are driving this trend. It’s gotta be a real kick in gut to see these incredible 30-year rates at 4.25% and 15-year rates at 3.75% and NOT be able to refinance. Either your credit stinks or your house is underwater and you don’t have cash to bridge the gap.

Heck, I did a refi 2 years back (thinking a 4.625% rate was great?!) and since I had put down 20% when I bought the house and the house lost a fair amount at appraisal from when we bought at the peak, I had to bring about $20,000 to closing to avoid PMI since I needed to keep my loan to value (LTV) at 80%. While I would have loved to have had that extra $20,000 to invest, spend or do anything other than pay forward a tax deductible low-interest loan, the alternative was completely unacceptable. Paying PMI (insurance to subsidize deadbeats) both on principle and practically speaking was not an option. So, I had to bring the cash to closing in order to keep our home at 80% LTV based on the appraisal. Now, I’m looking to refi again, into a 15-year mortgage at these lower rates. Chances are, our home has depreciated further as the comps in our area are terrible. Fortunately, I’ve saved up a few bucks and will have to just cover the difference again. I’m thankful (and proud) that our personal finances are in order to allow us the flexibility to take advantage of these incredible rates on a home we’re living in and paying a mortgage on anyway. No strategic defaults here, so we might as well make the best use of our cash to improve our bottom line.

Immediate Steps to Set Yourself Up for a Successful Refi

Credit Score – If you don’t know your FICO score, get it now. It’s the only one that matters and you can have it in seconds – FREE. See how to get your Free FICO Score.

Best Rates – Get The Best Rate Options Available – here’s a rate table with your local rate options.

Cash Flow – Save your money, defer spending, take some stock market gains off the table or do whatever you have to do to have enough cash to bring to closing so you can refi (hopefully with enough to avoid PMI at 80% LTV).

Get Off Your Butt – If you keep putting it off thinking rates will be this low forever, you may very well miss the opportunity of a lifetime. I’m not making predictions on timing or magnitude, but I am pointing out several potential signs of a Bubble in Treasuries. Next week may be the end of an era with the final Quantitative Easing Announcement from the Fed – this decade. When this bubble pops, rates of all durations will spike, driving up mortgage interest rates available to consumers and the game is over. They won’t be back down like that are now AFTER that binary event. By then, the world will have caught on to the money printing/currency-manipulation game, realize that at a 10% deficit/GDP and 100% debt/GDP ratio, they need to command higher interest rates for the US attempts to roll over debt. From there, rates go up directionally. I can’t say when or by how much and anyone that does is a fool. But directionally? I view this as a very high probability. So, it’s probably good to get your affairs in order and refi soon if you’ve been sitting on the sideline.

It’s got to be heartbreaking for people who are having trouble making their bills AND are underwater in their house to know if they had just a little cash they could decrease one of their bills substantially. Like so many things in finance, it’s always cheaper to have money than not.